For most high-income professionals, the rent-versus-buy decision comes down to one key factor: how long you expect to stay in the home. As a general rule, buying tends to make more sense if you will be there at least five years, while renting is often the better choice for shorter time periods. The reason is simple. Buying and selling a home comes with substantial transaction costs that many first-time homeowners underestimate. Between closing costs, legal fees, inspections, moving expenses, initial purchases, and eventual selling costs, it is not uncommon to spend roughly 15% of a home's value over the full buy-and-sell cycle. A $500,000 home can easily cost $75,000 to purchase and later sell, meaning the property must appreciate significantly just to break even.
Many people make the mistake of comparing only a mortgage payment to a rent payment. In reality, a mortgage represents the minimum cost of housing, while rent is often the maximum cost. Homeowners are responsible for property taxes, insurance, maintenance, repairs, and replacement of major systems and appliances. Water heaters, roofs, paint, flooring, driveways, and landscaping all require ongoing spending. This is particularly important for residents and other professionals who may relocate after a few years. While home values can rise quickly during certain periods, there is no guarantee of appreciation. In some cases, homeowners can hold a property for many years and still sell at a loss after accounting for transaction costs.
Ownership remains a powerful wealth-building tool, and in many situations buying a home is the right move. However, it often makes sense to rent for six to twelve months after moving to a new city. Doing so allows you to learn the area, evaluate the job, understand school districts and neighborhoods, and make a more informed purchase. Renting also provides flexibility and can create opportunities to negotiate better deals when buying. In some high-cost markets, long-term renting may remain the better financial choice because home prices have become disconnected from rental values. While every situation is different, the longer you expect to stay in a home, the stronger the case for ownership becomes. For shorter time horizons, renting is often the safer and more financially sound decision.
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Many high-income professionals wonder if they should rent their home or buy their home. There are a lot of factors that go into this question, but the main one is how long you're going to be in the home. As a rule of thumb, if you're going to be there five or more years, it generally makes sense to buy, and if you're going to be there less than that length of time, it generally makes sense to rent. The reason for that is that there are a lot of costs associated with buying and selling a home, and the longer you're in the home, the longer the period of time over which you can spread those costs out.
Those transaction costs are a lot higher than most people who have never owned a home think. It's pretty typical that you spend something like 5% of the value of the home buying it. I'm not talking about the down payment. I'm talking about expenses. That might be paying a realtor, paying an attorney, closing costs for the loan, fees, and those sorts of things. Flying out to look at the home. You recognize as soon as you move in that you've got to do some renovations just to get it up to speed. Maybe you've got to buy a lawnmower to take care of it because you've never done that before, and you've got to buy snow shovels and a bunch of fertilizer, those sorts of things. When you move into a home, those expenses add up. It's not insignificant, and many people who've never done it are shocked that it's a really expensive thing to do.
It's even worse on the back end. It's not unusual to pay 6% to the realtors who sell the home. Plus, it might sit vacant for a few months, and you might have to fix it up just to get it sold. Of course, you've got some other closing costs when you come to the table to actually get rid of the home. Altogether, it's probably 15% of the value of the home. If it's a $500,000 home, we're talking about $75,000 round trip to buy it and to sell it. You need that home, for the most part, to appreciate more than that 15%, more than that $75,000, while you're in it in order to come out ahead.
When I was a medical student, we bought a condo for $80,000. We sold it four years later for $83,000, and you would think we made money. We didn't make money because we didn't make more than the transaction costs cost us over that time period of owning that home for four years. Of course, there are periods of time when homes appreciate very rapidly, and you can come out ahead owning a home for only a year and a half. There are other times when homes are not appreciating at all. I have another house that I bought in 2006 that we sold for a loss in 2015, nine years later. There's not any sort of guarantee that you can even make money, even if you hold it for five years. You're just more likely to. I figure you're probably going to make money about 50% of the time when you own it for five years, probably a third of the time when you own it for three years.
The odds are against you for buying a house for most medical residencies. There are all kinds of other reasons why it's probably not a great idea for residents to buy a home. Certainly, far more residents than do should consider renting during residency. The nice thing about rent is it tells you the maximum you're going to pay for housing, whereas a mortgage payment only tells you the minimum you're going to pay for housing because there are all kinds of other expenses associated with owning a home.
It is not as simple as saying, "Oh, the mortgage is less than the rent would be, so I'll just buy it." That's not how it works. There's far more that goes into home ownership than just paying a mortgage. Not only are you paying the principal and interest on the mortgage, but you've got to pay property taxes, you have to insure the property, and you have to maintain the property.
Somebody's got to mow the lawn. Maybe you have to pay somebody else to do that or buy the equipment yourself. Somebody's got to take care of the driveway. If you live someplace where it snows, there are just a lot of things that happen in home ownership. Water heaters only last so long. Ovens only last so long. Microwaves only last so long. Carpet only lasts so long. Shingles and paint only last so long. Those are significant expenses. So it's not just about the mortgage payment versus the rent payment, and if you think that simplistically, you're going to make a lot of mistakes when it comes to housing in general.
I'm a big fan of ownership. I want doctors to own their homes. I want them to own investments where they're equity owners, such as stocks and real estate. I want them to own their practices and their jobs because they have more control over them. They're less likely to be burned out when they control their work environment. I think ownership is a good thing, but there are times when it just doesn't make sense to own your home. Typically, those times are when you're not going to be in the home very long. Usually, when you expect to be there long term, it makes sense to buy.
Now, you might not want to buy immediately when you move to a new town. You don't know the new town. You don't know that you're going to like the job. You don't know the job is going to like you. You're not exactly sure which areas you want to live in. You don't know where the schools are better than the other ones and which neighborhoods are better than the others. It can make sense when you move to a new town to rent for six or 12 months before you buy.
We did that when we moved to Utah and have no regrets about it whatsoever. We were able to be very opportunistic buyers because we had no timeline in which we had to buy a home. We could make offers that were lowball offers and wait and see how desperate the sellers were to sell their home. We ended up getting a very good deal on the home we've been in for the last decade, almost two decades. It can make sense not to buy immediately. Just be aware of that.
Now, of course, that means you've got to move twice. You've got to move now, and you've got to move again in a year when you actually buy the home. But it's probably worth it despite the additional hassle and additional expense. The home may appreciate in that time period, but you're also probably going to become significantly wealthier if you're like most doctors who become wealthier every year as they go throughout their lives. You may not buy the same home a year later that you would have bought immediately upon arriving in that city because you may realize, "Oh, I can afford a bigger, nicer home that I want more than the one I would have bought a year ago." There are lots of benefits to doing that.
There are also places in this country where the cost of renting versus owning is just so far out of whack that you may still want to rent. I think about the percentage of the value of the home that it costs to rent it in a place like San Francisco, and I can understand why people might choose to be long-term renters there. Even people who own real estate might buy rental real estate in Massachusetts or Missouri or Oklahoma and actually rent their place in San Francisco, and that can make sense.
Just keep in mind that there are some times and some places where the prices of homes have been bid up so high that they really aren't great investments. People who are buying them or holding them as investments are counting on appreciation rates that might not be all that realistic going forward.
This can be a complicated question, but most of the time it boils down to just how long you're going to be in the home. If you're going to be there five-plus years, you probably want to be buying. If you're going to be there for a year, you probably don't want to be buying. You can take a gamble if you think you're going to be there three, four, or five years, but recognize that the majority of the time you're going to lose money in those situations.
The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.
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